What is strategy and why is it important. (Chapter 1)

1.

CHAPTER 1
WHAT IS STRATEGY and
WHY IS IT IMPORTANT?
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2.

THIS CHAPTER WILL HELP YOU UNDERSTAND:
LO 1 What we mean by a company’s strategy.
LO 2 The concept of a sustainable competitive advantage.
LO 3 The five most basic strategic approaches for setting a
company apart from rivals and winning a sustainable
competitive advantage.
LO 4 That a company’s strategy tends to evolve because of
changing circumstances and ongoing efforts by
management to improve the strategy.
LO 5 Why it is important for a company to have a viable business
model that outlines the company’s customer value
proposition and its profit formula.
LO 6 The three tests of a winning strategy.
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3.

CORE CONCEPT
A company’s strategy is the set of
actions that its managers take to
outperform the company’s
competitors and achieve superior
profitability.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–3

4. WHAT DO WE MEAN BY STRATEGY ?

What is our present situation?
Where do we want to go from here?
Business environment and industry conditions
Firm’s financial and competitive capabilities
Creating a vision for the firm’s future direction
How are we going to get there?
Crafting an action plan for heading the firm in the
intended direction, staking out a market position,
attracting customers, achieving the targeted financial
and market performance, and getting the firm
where it wants to go is its strategy.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–4

5. WHAT IS STRATEGY ABOUT?

Strategy is all about How:
How to attract and please customers.
How to compete against rivals.
How to position the firm in the marketplace to capitalize
on attractive opportunities for growth.
How to respond to changing economic and market
conditions.
How to manage each functional piece of the business.
How to achieve the firm’s performance targets.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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6.

STRATEGIC MANAGEMENT PRINCIPLE
♦ Strategy is about competing differently from
rivals—doing what competitors don’t do or,
even better, doing what they cannot do!
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–6

7. WHY BOTHER WITH STRATEGY?

A firm needs a strategy to specify what actions
are going to be taken:
To improve its financial performance.
To strengthen its competitive position.
To gain a sustainable competitive advantage over its
market rivals.
A creative, distinctive strategy:
Helps produce above-average profits.
Increases competitive pressures on rivals.
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1–7

8. STRATEGY AND COMPETITORS

Strategy is about competing differently
from rivals—
Doing what they do not do or doing it better!
Doing what they cannot do!
Doing things in ways that attract customers
and set a firm apart from its rivals.
Doing things in a manner calculated to
produce a competitive edge over rivals.
Knowing what the firm must do and also
what it must not do.
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9.

FIGURE 1.1
Identifying a Company’s Strategy–What to Look For
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1–9

10. Starbucks’s Strategy in the Coffeehouse Market

ILLUSTRATION
CAPSULE 1.1
Starbucks’s Strategy in
the Coffeehouse Market
♦ Key elements of Starbucks’s strategy:
● Train
“baristas” to serve a wide variety of specialty coffee
drinks that allow customers to satisfy their individual
preferences in a customized way.
● Emphasize
store ambience and elevation of the customer
experience at Starbucks stores.
● Purchase
● Foster
and roast only top-quality coffee beans.
commitment to corporate responsibility.
● Expand
the number of Starbucks stores domestically and
internationally.
● Broaden
and periodically refresh in-store product offerings.
● Fully
exploit the growing power of the Starbucks name and
brand image with out-of-store sales.
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1–10

11. STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE

Competitive Advantage
Requires meeting customer needs either more
effectively (with products or services that customers
value more highly) or more efficiently (by providing
products or services at lower cost).
Sustainable Competitive Advantage
Requires giving buyers lasting reasons to prefer a
firm’s products or services over those of its
competitors.
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1–11

12. BASIC STRATEGIC APPROACHES

Strategies for Building
Competitive Advantage
Low-cost
provider
Focused
low-cost
Broad
differentiation
Best-cost
provider
Focused
differentiation
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1–12

13. STRATEGIC APPROACHES

Building a competitive advantage by:
Striving to become the industry’s low-cost provider
(efficiency).
Outcompeting rivals on differentiating features
(effectiveness).
Offering the lowest (best) prices for differentiated
goods (best-cost provider).
Focusing on better serving a niche market’s needs
(efficiency and\or effectiveness).
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–13

14.

CORE CONCEPT
♦ A firm achieves a competitive advantage
when it provides buyers with superior value
compared to rival sellers or offers the same
value at a lower cost to the firm.
♦ The firm achieves a sustainable competitive
advantage if its advantage persists despite
the best efforts of competitors to match or
surpass its advantage.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–14

15. GAINING SUSTAINABLE COMPETITIVE ADVANTAGE

How to create a sustainable competitive advantage:
Develop valuable expertise and competitive
capabilities over the long-term that rivals cannot
readily copy, match or best.
Put the constant quest for sustainable competitive
advantage at center stage in crafting your strategy.
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
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1–15

16. WHY A COMPANY’S STRATEGY EVOLVES OVER TIME

Managers modify strategy in response to:
Changing market conditions
Advancing technology
Fresh moves of competitors
Shifting buyer needs
Emerging market opportunities
New ideas for improving the strategy
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1–16

17.

STRATEGIC MANAGEMENT PRINCIPLE
♦ Changing circumstances and ongoing
management efforts to improve the strategy
cause a company’s strategy to evolve over
time—a condition that makes the task of
crafting strategy a work in progress, not a
one-time event.
♦ A company’s strategy is shaped partly by
management analysis and choice and partly
by the necessity of adapting and learning by
doing.
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1–17

18. THE EVOLVING NATURE OF A FIRM’S STRATEGY

Realized (current) strategy is a blend of:
Proactive (deliberate) strategy elements that include
both continued and new initiatives.
Reactive (emergent) strategy elements that are
required due to unanticipated competitive
developments and fresh market conditions.
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1–18

19.

CORE CONCEPT
♦ A company’s deliberate strategy consists of
proactive strategy elements that are both
planned and realized as planned; its
emergent strategy consists of reactive
strategy elements that emerge as changing
conditions warrant.
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
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1–19

20.

FIGURE 1.2
A Company’s Strategy Is a Blend of Proactive Initiatives
and Reactive Adjustments
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21.

THINKING STRATEGICALLY
♦ Just for Fun:
Using the terms shown in Exhibit 1.2, explain why
U.S. football teams get four downs to make a first
down.
How does risk affect play selection (strategy) as a
team fails to advance on each of its four downs?
What rules of play in other sports affect how the
basic principles of strategy are applied to game
play?
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–21

22. THE RELATIONSHIP BETWEEN A FIRM’S STRATEGY AND ITS BUSINESS MODEL

Realized
Strategy
Competitive
Initiatives
Business
Approaches
Business
Model
$$$
?
Value
Proposition
Profit Formula
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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23. A COMPANY’S STRATEGY AND ITS BUSINESS MODEL

How the business will make money :
By providing customers with value.
The firm’s customer value proposition
By generating revenues sufficient to cover costs and
produce attractive profits.
The firm’s profit formula
It takes a proven business model—one that
yields appealing profitability—to demonstrate
viability of a firm’s strategy.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–23

24.

CORE CONCEPT
♦ A company’s business model sets forth the
logic for how its strategy will create value for
customers, while at the same time generate
revenues sufficient to cover costs and realize a
profit.
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1–24

25. BUSINESS MODEL ELEMENTS

The Customer Value Proposition
Satisfying buyer wants and needs at a price
customers will consider a good value.
The greater the value provided (V) and the lower
the price (P), the more attractive the value
proposition is to customers.
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1–25

26. BUSINESS MODEL ELEMENTS (CONT’D)

The Profit Formula
Creating a cost structure that allows for acceptable
profits, given that pricing is tied
to the customer value proposition.
V—the value provided to customers
P—the price charged to customers
C—the firm’s costs
The lower the costs (C) for a given customer value
proposition (V–P), the greater the ability of the
business model to be a moneymaker.
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1–26

27.

FIGURE 1.3
The Business Model and the Value-Price-Cost Framework
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–27

28.

THINKING STRATEGICALLY
♦ Amazon's continuing lack of profitability has
begun to concern its long-term investors.
What internal and external factors could be
contributing to the lack of profitability?
How could the problem be explained in terms of
changes in the value, price, and cost factors
associated with Amazon's business model?
What must Amazon do now to create a business
model that is sustainable over the long term?
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1–28

29. Pandora, Sirius XM, and Over-the-Air Broadcast Radio: Three Contrasting Business Models

ILLUSTRATION
CAPSULE 1.2
Pandora, Sirius XM, and Over-the-Air
Broadcast Radio: Three Contrasting
Business Models
♦ Who listens to the radio anymore?
● Given
the changes in how people listen to music,
are the business models of Pandora, Sirius XM
and over-the-air broadcasters viable over the
long term?
● Which
competitor’s present strategy best passes
the three tests of a winning strategy?
● What
internal and external factors will create
particular difficulties for each competitor in
changing its strategy or business model?
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30. IS OUR STRATEGY A WINNER?

The Strategic
Fit Test
The Competitive
Advantage Test
Winning
Strategy
The Performance
Test
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31. WHAT MAKES A STRATEGY A WINNER?

A winning strategy must pass three tests:
The Fit Test
The Competitive Advantage Test
Does it exhibit dynamic fit with the external and
internal aspects of the firm’s overall situation?
Can it help the firm achieve a significant and
sustainable competitive advantage?
The Performance Test
Can it produce good performance as measured by
the firm’s profitability, financial and competitive
strengths, and market standing?
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32. WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS

Strategy provides:
A prescription for doing business.
A road map to competitive advantage.
A game plan for pleasing customers.
A formula for attaining long-term standout
marketplace performance.
Good Strategy + Good Strategy Execution =
Good Management
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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33.

STRATEGIC MANAGEMENT PRINCIPLE
♦ How well a company performs is directly
attributable to the caliber of its strategy and the
proficiency with which the strategy is executed.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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34.

THINKING STRATEGICALLY
♦ Google’s web browser-based Chrome
operating system and its online applications
suite are now challenging Microsoft’s long-term
dominance of those marketplace sectors.
♦ What should be Microsoft’s first response to
this competitive challenge?
♦ How will Microsoft’s response to this
competitor’s actions affect its business model?
♦ Which competitor’s strategy will likely be the
eventual winner in the marketplace? Why?
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35. THE ROAD AHEAD

Strategy is about asking the right questions:
What must managers do, and do well, to make
a firm a winner in the marketplace?
Strategy requires getting the right answers:
Good strategic thinking and good management of
the strategy-making, strategy-executing process.
First-rate capabilities and skills in crafting and
executing strategy are essential to managing
successfully.
Welcome and best wishes for your success!
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